Determining the Return-Maximizing Portfolio Leverage and its Limitations

Ott, Robert A.; Zimmer, Timothy E.

doi:10.2139/ssrn.2717074

Cited by 2 publications

(2 citation statements)

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“…Expanding on the work of Scott and Watsun (2013), Ott and Zimmer (2016) show the return of an investment with leverage L is:…”

Section: Mathematics Of Letfsmentioning

confidence: 99%

“…In 2015, the BND return is 0.56% also resulting in slight underperformance by LETF portfolios. However, in 2010, 2011, 2012, 2014, 2016, and 2017 when the aggregate bond fund did relatively well, the LETF portfolios outperform by up to five percent over a traditional portfolio (see the 3x LETF portfolio in 2011). On average, even under a near zero interest rate environment over the last eight years, a portfolio of LETFs outperforms a traditional portfolio.…”

Section: To 2017 Portfolio Returnsmentioning

confidence: 99%

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A portfolio of leveraged exchange traded funds

Trainor, Jr.,

Chhachhi,

Brown

2020

FSR

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This study demonstrates how a portfolio of leveraged exchange traded funds (LETFs) targeting a unit exposure to their underlying indexes outperforms a portfolio using traditional ETFs while simultaneously reducing downside risk. By extension, a 3x LETF portfolio designed to mimic 2x LETFs outperforms the underlying 2x LETF portfolio. The results are primarily a function of LETFs borrowing short while the investor lends the additional wealth generated from this leverage in one- to seven-year Treasury bonds or similar type of assets. For every one percent earned above the implied borrowing rate, a portfolio of 2x and 3x LETFs outperforms a traditional portfolio by 0.41% and 0.63%, respectively, corresponding roughly to the additional return on the 50% and 67% of the wealth invested in bonds. More than 90% of LETFs outperformance is explained by the borrowing lending differential.

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“…Expanding on the work of Scott and Watsun (2013), Ott and Zimmer (2016) show the return of an investment with leverage L is:…”

Section: Mathematics Of Letfsmentioning

confidence: 99%

Section: To 2017 Portfolio Returnsmentioning

confidence: 99%